2018 was a year of rising interest rates and a tighter lending environment. This question often comes up – how much are buyers impacted if interest rates continue to climb up? Here is a recap of how your maximum mortgage amount is calculated:
1. GDS (Gross Debt Service Calculation: You are allowed to be 39% of your Gross Income to go toward your housing costs, including your mortgage payment, property taxes, heating and half of a condo fee (if applicable).
2. TDS (Total debt Service Calculation: You are allowed to go up to a maximum of 44% of your total Gross Income to cover your housing expenses as noted above plus any other debt (ex: car loan, student loans, personal loans, credit card debt and lines of credit)
As interest rates increase, so does your mortgage payments there for decreasing your maximum mortgage amount.
For my math, I assumed a household income of $80,000, property taxes at $3500 a year, no condo fees and for simple math, no debt. I also assumed an insured mortgage with a 25 year amortization and GDS and TDS at 39/44.
Here are the maximum calculations for a range of interest rates:
4.34% – maximum purchase price of $410,000 (qualifying rate in 2017)
5.34% – maximum purchase price of $371,000 (qualifying rate in 2018) A price drop of $39,000
6.34% – maximum purchase price of $338,000 (A price drop of $33,000)
7.34% – maximum purchase price of $309,000 (A price drop of $29,000)
Waiting cost’s money by not being able to qualify for a home you want as well as the increase in your mortgage payments due to rising interest rates.
It’s All About The Qualifying Rate, Not The Interest Rate You Get
When looking at the calculations noted above, as qualifying rates continue to change and move up, your buying power drops. The actual interest rate you get has nothing to do with the Stress Test and how insured borrowers (less than 20% down payment) have to qualify for a home.
Conventional home buyers have even more stringent rules as they have to qualify at current contract rate (the rate they get) plus another 2% or the Bank of Canada Benchmark rate which is currently 5.34% (whichever is greater).
Get Pre-approved today to find out where you stand. If you continue to wait to purchase a home and the Qualifying Stress Test continues to rise, the purchase price you were hoping to buy may no longer be in your sights.